Family and Medical Leave Tax Credit FAQs Provide Transition Relief and Explain Interaction With FMLA

The IRS has released Notice 2018-71, providing detailed guidance on the Code § 45S employer tax credit for paid family and medical leave created by the Tax Cuts and Jobs Act (see our Checkpoint article) in the form of 34 FAQs. To claim the credit, eligible employers must have a written program that pays at least 50% of wages to qualified employees for at least two weeks of annual paid family and medical leave. Eligible employers paying 50% of wages may claim a general business credit of 12.5% of wages paid for up to 12 weeks of family and medical leave a year, with the credit increasing to as much as 25% if the rate of payment exceeds 50%. A previous set of IRS FAQs provided general guidance on the credit. Here are highlights of the additional FAQs:

• Transition Relief. The credit is generally effective for wages paid in taxable years beginning after December 31, 2017, and before January 1, 2020. A transition rule allows eligible employers that set up a qualifying program (or amend an existing program) by December 31, 2018, to claim the credit for eligible leave already provided during their 2018 tax year.
• Leave for FMLA Purposes. The notice clarifies that family and medical leave eligible for the credit is defined the same as leave for Family and Medical Leave Act (FMLA) purpose. This generally includes an eligible employee’s leave (1) following the birth of a child or placement of a child for adoption or foster care; (2) to care for a spouse, child, or parent with a serious health condition; or (3) for the employee’s own serious health condition. Certain military “qualifying exigencies” and care for a covered servicemember with a serious injury or illness (as defined by the FMLA) are also eligible.
• Other Restrictions on Eligible Leave. To be eligible for the credit, leave must be specifically designated for an FMLA purpose, may not be used for any other reason, and may not be paid by a state or local government or required by a state or local law. Leave provided under an employer’s insured or self-insured short-term disability program may be eligible, if it otherwise meets applicable requirements. However, the credit is only available for leave provided to employees whose prior-year compensation was at or below a specified amount. For tax year 2018, the employee’s 2017 compensation from the employer must have been $72,000 or less.
• Employers Not Subject to the FMLA. An employer need not be subject to the FMLA to claim the credit. However, employers with one or more employees who are not covered by the FMLA (for instance, because the employer is not subject to the FMLA or because the employee has not completed the requisite number of hours) must include “non-interference” language in their written policies. Sample language is provided.

EBIA Comment: This notice also provides guidance on additional topics, including who may claim the credit, and how to calculate and claim it, with many useful examples. It also announces that the IRS intends to issue proposed regulations on the credit, although a timeframe is not provided. For more information, see EBIA’s Group Health Plan Mandates manual at Sections XVII.A (“What Is the FMLA and Who Must Comply”) and XVII.M (“Interaction of the FMLA With Other Federal Laws”).

Contributing Editors: EBIA Staff.